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    Question

    Individuals should be asked to pay taxes according to

    their ability to pay. As income increases the taxes should increase. Which of the following principles of taxation is based on equity and fairness?
    A Horizontal equity Correct Answer Incorrect Answer
    B Vertical equity Correct Answer Incorrect Answer
    C Benefit Principle Correct Answer Incorrect Answer
    D Cost of service principle Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Horizontal Equity:  It is the notion that equally situated individuals should be taxed equally. More specifically, persons of equal income should pay identical amounts in taxes. But it is very difficult to apply the concept in practice.  Vertical Equity : This means that unequals should be treated unequally. This concept is also known as ability-to-pay principle. It means the total tax burden will be distributed among individuals according to their capacity to bear it, taking into account all of the relevant personal characteristics.

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